The IRS has issued regulations and procedures dealing with the expense, repair, or capitalization of various types of assets, materials and supplies. As a result, we must advise all of our clients who claim depreciation and/or write-off such purchases as a business expense that they need to do something, specifically adopt an accounting method which is permitted under the new regulations and make an election to do so.
IRC Section 263A was originally enacted in 1986 and amended a number of times over the years, most recently in 2005. It is, at least in the eyes of the Internal Revenue Service, the operative guide to what is permitted and/or allowed regarding expense v. capitalization.
IRC Section 263A(i) includes this language: “The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section…” This is a directive, by the Congress to the Secretary of the Treasury, to write regulations (shall prescribe) applicable to a particular Code section. IRC Section 263 (which predates Section 263A by many years) does not have any similar language.
Reg. 1.263(a)-1 – Capital expenditures; in general. - appears to be written under the authority of IRC Section 263A(i). This would appear to allow the Secretary of the Treasury the authority to “carry out the purposes” of Code Section 263A, which may include defining an accounting method change. See the general rule as contained in IRC Section 446(e) - requirements respecting change of accounting method. Regulation 263(a)-1(g) excludes the safe harbor election method change (see below) from the need to obtain accounting method change approval by stating that this is not an accounting method change. This appears to be a reinterpretation of Code Section 446(e).
Code Section 446, however, does not provide for any delegation of authority.
Now comes Regulation Sec. 1.263(a)-1(f) which provides for a safe harbor election available for our clients who do not have “applicable financial statements” which are, essentially financials which are submitted to the SEC and/or are “certified audited” by a CPA or a foreign equivalent. The annual election is made on an original return filed by the due date, including extensions. The election, or failure to make one, is irrevocable.
Regulation 1.263A-1(k) defines and explains that this type of action is a change in accounting method and requires advance approval from the IRS in accordance with Code Section 446(e). See also Reg. 1.446-1(e)(3)(ii) which sets out the authority for the IRS to establish administrative procedures (i.e. use of Form 3115) for obtaining the required approval. The procedures are outlined in Rev. Proc. 2011-14.
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| William Delaney, EA Westwood, MA |
Rev. Proc. 2014-16 modifies Rev. Proc. 2011-14 (issued to outline the Code Section 446 requirements) and changes the automatic (if applied for) accounting change approval to the extent that a Section 263 Election action does not rise to the level of an accounting method change. If that is so, there is no need to file a Form 3115.
At this point, if you are totally confused, so am I. There is more than enough contradictory information for this writer to conclude that the only prudent course to follow to protect clients who are making this election is to also make a one-time filing of Form 3115 and invoke an automatic consent provision under Rev. Proc. 2011-14. This appears to be a change #8 under Part I, 1(a) of Form 3115 and would require some boiler plate explanation under Part II, 12 and 13, and Part III, 18. It does not seem that the remainder of the form need be completed.
A sample safe harbor election (for internal accounting record use) is attached. Many preparers plan to use a more detailed format. Most professional software packages already have a boiler plate format available for attachment to the actual return. We are unable to provide guidance as to what will be acceptable by the IRS.
Internal Expense/Capitalization Policy for Books & Records And Financial Statement Preparation
This will confirm our formerly unwritten policy which has been and continues to be that a capital asset is a unit of property with a useful life exceeding one year and a per unit acquisition cost exceeding $500. Such capital assets will be depreciated over their useful lives.
Tangible assets with a cost not to exceed $500 are expensed in the year of purchase.
Invoices substantiating such purchases are retained for a minimum of seven years for assets expensed in the year of purchase, and for the useful life of a capital asset which is subject to depreciation over a period of years.
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Date Name of Entity
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Authorized Signature
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